-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ADxmwKJEgAYENV+jEXtvRZ5CW9sIC9HAGhLS2KBtfPqJ+9y3Yfq5Xrfh7E/7/PKz ZQ2/4L5CNSFR9vEc70XgzQ== 0000783280-98-000056.txt : 19981116 0000783280-98-000056.hdr.sgml : 19981116 ACCESSION NUMBER: 0000783280-98-000056 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DUKE REALTY INVESTMENTS INC CENTRAL INDEX KEY: 0000783280 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 351740409 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09044 FILM NUMBER: 98745878 BUSINESS ADDRESS: STREET 1: 8888 KEYSTONE CROSSING STREET 2: STE 1200 CITY: INDIANAPOLIS STATE: IN ZIP: 46240 BUSINESS PHONE: 3175743531 MAIL ADDRESS: STREET 1: 8888 KEYSTONE CROSSING STREET 2: STE 1200 CITY: INDIANAPOLIS STATE: IN ZIP: 46240 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 ------------------ OR / / SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . ------ ------ ------------------------------------------------------------------------ Commission File Number: 1-9044 ------ DUKE REALTY INVESTMENTS, INC. State of Incorporation: IRS Employer ID Number: Indiana 35-1740409 - ---------------------- ---------------------- Address of principal executive offices: 8888 Keystone Crossing, Suite 1200 ---------------------------------- Indianapolis, Indiana 46240 ---------------------------- Telephone: (317) 808-6000 ------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of Common Shares outstanding as of November 10, 1998 was 83,694,882 ($.01 par value). DUKE REALTY INVESTMENTS, INC. INDEX PART I - FINANCIAL INFORMATION PAGE - ------------------------------ ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 1998 (Unaudited) and December 31, 1997 2 Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 1998 and 1997 (Unaudited) 3 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997 (Unaudited) 4 Condensed Consolidated Statement of Shareholders' Equity for the nine months ended September 30, 1998 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6-7 Independent Accountants' Review Report 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-17 PART II - OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings 18 Item 2. Changes in Securities 18 Item 3. Defaults Upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, December 31, ASSETS 1998 1997 ------ ------------- ------------ (UNAUDITED) Real estate investments: Land and improvements $ 290,567 $ 231,614 Buildings and tenant improvements 1,963,006 1,591,604 Construction in progress 139,044 107,242 Investments in unconsolidated companies 125,655 106,450 Land held for development 124,237 139,817 --------- --------- 2,642,509 2,176,727 Accumulated depreciation (161,649) (116,264) --------- --------- Net real estate investments 2,480,860 2,060,463 Cash and cash equivalents 22,033 10,353 Accounts receivable from tenants, net of allowance of $717 and $420 6,798 5,932 Straight-line rent receivable, net of allowance of $841 19,318 14,746 Receivables on construction contracts 32,253 22,700 Deferred financing costs, net of accumulated amortization of $11,576 and $9,101 11,473 12,386 Deferred leasing and other costs, net of accumulated amortization of $14,736 and $9,251 45,749 34,369 Escrow deposits and other assets 32,525 15,265 --------- --------- $2,651,009 $2,176,214 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Indebtedness: Secured debt $ 328,045 $ 367,119 Unsecured notes 590,000 340,000 Unsecured line of credit 109,000 13,000 --------- --------- 1,027,045 720,119 Construction payables and amounts due subcontractors 43,028 40,786 Accounts payable 4,727 1,342 Accrued expenses: Real estate taxes 36,559 25,203 Interest 7,866 6,883 Other 19,651 13,848 Other liabilities 15,368 11,720 Tenant security deposits and prepaid rents 17,411 14,268 --------- --------- Total liabilities 1,171,655 834,169 --------- --------- Minority interest 108,703 107,364 --------- --------- Shareholders' equity: Preferred shares and paid-in capital ($.01 par value); 5,000 shares authorized: 9.10% Series A, 300 shares issued and outstanding (liquidation preference of $75,000) 72,288 72,288 7.99% Series B, 300 shares issued and outstanding (liquidation preference of $150,000) 146,050 146,050 Common shares and paid-in capital ($.01 par value); 150,000 shares authorized; 82,570 and 76,065 shares issued and outstanding 1,215,038 1,071,990 Distributions in excess of net income (62,725) (55,647) --------- --------- Total shareholders' equity 1,370,651 1,234,681 --------- --------- $2,651,009 $2,176,214 ========= =========
See accompanying Notes to Condensed Consolidated Financial Statements - 2 - DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (in thousands, except per share amounts) (Unaudited)
Three months ended Nine months ended September 30, September 30, ------------------- -------------------- 1998 1997 1998 1997 ------- -------- -------- -------- RENTAL OPERATIONS: Revenues: Rental income $87,699 $53,729 $245,037 $152,589 Equity in earnings of unconsolidated companies 2,649 2,489 8,066 6,133 ------ ------ ------- ------- 90,348 56,218 253,103 158,722 ------ ------ ------- ------- Operating expenses: Rental expenses 16,115 10,204 43,799 28,226 Real estate taxes 8,984 5,252 24,871 14,367 Interest expense 16,701 9,606 43,926 28,247 Depreciation and amortization 17,660 10,702 48,445 30,253 ------ ------ ------- ------- 59,460 35,764 161,041 101,093 ------ ------ ------- ------- Earnings from rental operations 30,888 20,454 92,062 57,629 ------ ------ ------- ------- SERVICE OPERATIONS: Revenues: Property management, maintenance and leasing fees 3,606 3,315 10,240 9,170 Construction management and development fees 3,425 2,385 8,115 5,096 Other income 253 217 851 719 ------ ------ ------- ------- 7,284 5,917 19,206 14,985 ------ ------ ------- ------- Operating expenses: Payroll 3,178 2,542 9,865 7,427 Maintenance 613 498 1,811 1,414 Office and other 678 552 2,000 1,645 ------ ------ ------- ------- 4,469 3,592 13,676 10,486 ------ ------ ------- ------- Earnings from service operations 2,815 2,325 5,530 4,499 ------ ------ ------- ------- General and administrative expense (2,792) (1,457) (8,235) (4,347) ------ ------ ------- ------- Operating income 30,911 21,322 89,357 57,781 OTHER INCOME (EXPENSE): Interest income 518 795 1,107 1,222 Earnings from property sales 661 1,425 1,615 1,807 Other expense (131) (220) (192) (639) Minority interest in earnings of unitholders (3,116) (1,691) (9,264) (5,021) Other minority interest in earnings of subsidiaries (692) (350) (946) (775) ------ ------ ------- ------- Net income 28,151 21,281 81,677 54,375 Dividends on preferred shares (4,702) (4,370) (14,108) (7,782) ------ ------ ------- ------- Net income available for common shares $23,449 $16,911 $ 67,569 $ 46,593 ====== ====== ======= ======= Net income per common share: Basic $ .29 $ .26 $ .85 $ .74 ====== ====== ======= ======= Diluted $ .29 $ .26 $ .84 $ .73 ====== ====== ======= ======= Weighted average number of common shares outstanding 81,594 65,309 79,461 63,380 ====== ====== ======= ======= Weighted average number of common and dilutive potential common shares 93,279 72,971 91,252 71,054 ====== ====== ======= =======
See accompanying Notes to Condensed Consolidated Financial Statements - 3 - DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, (IN THOUSANDS) (UNAUDITED)
1998 1997 ---------- --------- Cash flows from operating activities: Net income $ 81,677 $ 54,375 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of buildings and tenant improvements 43,039 26,707 Amortization of deferred financing costs 1,018 1,025 Amortization of deferred leasing and other costs 5,406 3,546 Minority interest in earnings 10,210 5,796 Straight-line rent adjustment (4,763) (2,507) Earnings from property sales (1,615) (1,807) Construction contracts, net (7,311) 13,290 Other accrued revenues and expenses, net 26,099 13,614 Equity in earnings in excess of distributions received from unconsolidated companies (4,651) (3,901) ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 149,109 110,138 ------- ------- Cash flows from investing activities: Rental property development costs (163,682) (142,028) Acquisition of rental properties (231,338) (213,673) Acquisition of land held for development and infrastructure costs (25,139) (58,865) Recurring costs: Tenant improvements (7,611) (5,901) Leasing costs (4,668) (3,614) Building improvements (1,572) (480) Other deferred leasing costs (11,533) (12,599) Other deferred costs and other assets (18,661) (4,481) Proceeds from property sales, net 7,498 31,741 Other distributions received from unconsolidated companies - 60,000 Net investment in and advances to unconsolidated companies (14,095) (30,636) ------- ------- NET CASH USED BY INVESTING ACTIVITIES (470,801) (380,536) ------- ------- Cash flows from financing activities: Proceeds from issuance of common shares, net 136,661 300,472 Proceeds from issuance of preferred shares, net - 146,050 Proceeds from indebtedness 250,000 100,000 Borrowings (repayments) on lines of credit, net 96,000 (34,000) Repayments on indebtedness including principal amortization (48,269) (7,076) Distributions to common shareholders (74,647) (50,594) Distributions to preferred shareholders (14,108) (7,782) Distributions to minority interest (10,910) (6,548) Deferred financing costs (1,355) (1,326) ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES 333,372 439,196 ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS 11,680 168,798 Cash and cash equivalents at beginning of period 10,353 5,334 ------- ------- Cash and cash equivalents at end of period $ 22,033 $174,132 ------- -------
See accompanying Notes to Condensed Consolidated Financial Statements - 4 - DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Preferred Shares Common Shares Distributions and Paid-in and Paid-in in Excess of Capital Capital Net Income Total ---------------- ------------- ------------- ----------- BALANCE AT DECEMBER 31, 1997 $218,338 $1,071,990 $(55,647) $1,234,681 Net income - - 81,677 81,677 Issuance of common shares, net of underwriting discounts and offering costs of $5,401 - 137,344 - 137,344 Acquisition of minority interest - 5,704 - 5,704 Distributions to common shareholders ($.94 per common share) - - (74,647) (74,647) Distributions to preferred shareholders - - (14,108) (14,108) ------- --------- ------- --------- BALANCE AT SEPTEMBER 30, 1998 $218,338 $1,215,038 $(62,725) $1,370,651 ======= ========= ====== =========
See accompanying Notes to Condensed Consolidated Financial Statements - 5 - DUKE REALTY INVESTMENTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. FINANCIAL STATEMENTS The interim condensed consolidated financial statements included herein have been prepared by Duke Realty Investments, Inc. (the "Company") without audit. The statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report to Shareholders. THE COMPANY The Company's rental operations are conducted through Duke Realty Limited Partnership ("DRLP"), of which the Company owns 88.4% at September 30, 1998. The remaining interests in DRLP are exchangeable for shares of the Company's common stock on a one-for- one basis. In addition, the Company conducts operations through Duke Realty Services Limited Partnership and Duke Construction Limited Partnership, in which the Company's wholly-owned subsidiary, Duke Services, Inc., is the sole general partner. The consolidated financial statements include the accounts of the Company and its majority-owned or controlled subsidiaries. The equity interests in these majority-owned or controlled subsidiaries not owned by the Company are reflected as minority interests in the consolidated financial statements. 2. LINES OF CREDIT The Company has a $450 million unsecured revolving credit facility which is available to fund the development and acquisition of additional rental properties and to provide working capital. The revolving line of credit matures in April 2001 and bears interest payable monthly at the 30-day London Interbank Offered Rate ("LIBOR") plus .50% - .80%. The Company also has a demand $7 million secured revolving credit facility which is available to provide working capital. This facility bears interest payable monthly at the 30-day LIBOR rate plus .65%. 3. RELATED PARTY TRANSACTIONS The Company provides management, maintenance, leasing, construction, and other tenant related services to properties in which certain executive officers have continuing ownership interests. The Company was paid fees totaling $2.0 million and $2.4 million for such services for the nine months ended September 30, 1998 and 1997, respectively. Management believes the terms for such services are equivalent to those available in the market. The Company has an option to purchase the executive officers' interest in each of these properties which expires October 2003. The option price of each property was established at the date the option was granted. - 6 - 4. NET INCOME PER COMMON SHARE Basic net income per common share is computed by dividing net income available for common shares by the weighted average number of common shares outstanding for the period. Diluted net income per share is computed by dividing the sum of net income available for common shares and minority interest in earnings of unitholders, by the sum of the weighted average number of common shares and dilutive potential common shares outstanding for the period. The following table reconciles the components of basic and diluted net income per common share for the three and nine months ended September 30:
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1998 1997 1998 1997 ------ ------ ------ ------ Basic net income available for common shares $23,449 $16,911 $67,569 $46,593 Minority interest in earnings of unitholders 3,116 1,691 9,264 5,021 ------ ------ ------ ------ Diluted net income available for common shares and dilutive potential shares $26,565 $18,602 $76,833 $51,614 ====== ====== ====== ====== Weighted average number of common shares outstanding 81,594 65,309 79,461 63,380 Weighted average partnership units outstanding 10,840 6,760 10,894 6,858 Dilutive shares for long-term compensation plans 845 902 897 816 ------ ------ ------ ------ Weighted average number of common shares and dilutive potential common shares 93,279 72,971 91,252 71,054 ====== ====== ====== ======
5.SUBSEQUENT EVENTS On October 22, 1998, the Board of Directors declared a dividend of $.34 per share of common stock which is payable on November 30, 1998, to common shareholders of record on November 12, 1998. On October 22, 1998, the Board of Directors declared a dividend of $.56875 per depositary share of Series A Cumulative Preferred Shares which is payable on November 30, 1998, to preferred shareholders of record on November 16, 1998. Each depositary share represents one-tenth of a share of the Company's 9.10% Series A Preferred Shares. On October 22, 1998, the Board of Directors declared a dividend of $.99875 per depositary share of Series B Cumulative Step-up Redeemable Preferred Shares which is payable on December 31, 1998, to preferred shareholders of record on December 17, 1998. Each depositary share represents one-tenth of a share of the Company's 7.99% Series B Preferred Shares. - 7 - INDEPENDENT ACCOUNTANTS' REVIEW REPORT -------------------------------------- The Board of Directors DUKE REALTY INVESTMENTS, INC.: We have reviewed the condensed consolidated balance sheet of Duke Realty Investments, Inc. and subsidiaries as of September 30, 1998, the related condensed consolidated statements of operations for the three and nine months ended September 30, 1998 and 1997, the related condensed consolidated statements of cash flows for the nine months ended September 30, 1998 and 1997, and the related condensed consolidated statement of shareholders' equity for the nine months ended September 30, 1998. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Duke Realty Investments, Inc. and subsidiaries as of December 31, 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated January 28, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1997 is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived. KPMG Peat Marwick LLP Indianapolis, Indiana October 30, 1998 - 8 - ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW -------- The Company's operating results depend primarily upon income from the rental operations of its industrial, office and retail properties located in its primary markets. This income from rental operations is substantially influenced by the supply and demand for the Company's rental space in its primary markets. In addition, the Company's continued growth is dependent upon its ability to maintain occupancy rates and increase rental rates of its in- service portfolio and to continue development and acquisition of additional rental properties. The Company's primary markets in the Midwest have continued to offer strong and stable local economies and have provided attractive new development opportunities because of their central location, established manufacturing base, skilled work force and moderate labor costs. Consequently, the Company's occupancy rate of its in-service portfolio has exceeded 93.7% the last two years. The Company expects to continue to maintain its overall occupancy at comparable levels and also expects to be able to increase rental rates as leases are renewed or new leases are executed. This stable occupancy as well as increasing rental rates should improve the Company's results of operations from its in-service properties. The Company's strategy for continued growth also includes developing and acquiring additional rental properties in its primary markets and expanding into other attractive Midwestern markets. The following table sets forth information regarding the Company's in-service portfolio of rental properties as of September 30, 1998 and 1997 (in thousands, except percentages):
Total Percent of Square Feet Total Square Feet Percent Occupied --------------- ----------------- ---------------- Type 1998 1997 1998 1997 1998 1997 ---- ------ ------ ------ ------ ------ ------ INDUSTRIAL Service Centers 5,382 3,122 10.9% 9.1% 93.7% 93.4% Bulk 29,009 20,134 58.6 58.8 95.1% 94.6% OFFICE Suburban 12,169 8,593 24.6 25.1 96.0% 96.8% CBD 699 699 1.4 2.0 97.0% 94.0% RETAIL 2,249 1,692 4.5 5.0 97.0% 96.3% ------ ------ ----- ----- Total 49,508 34,240 100.0% 100.0% 95.3% 95.1% ====== ====== ===== =====
Management expects occupancy of the in-service property portfolio to remain stable because (i) only 3.9% and 10.8% of the Company's occupied square footage is subject to leases expiring in the remainder of 1998 and in 1999, respectively, and (ii) the Company's renewal percentage averaged 81%, 80% and 65% in 1997, 1996 and 1995, respectively. - 9 - The following table reflects the Company's in-service portfolio lease expiration schedule as of September 30, 1998 by product type indicating square footage and annualized net effective rents under expiring leases (in thousands, except per square foot amounts):
Industrial Office Retail Total Portfolio ----------------- ---------------- --------------- ------------------ Yr of Sq. Contract Sq. Contract Sq. Contract Sq. Contract Exp. Ft. Rent Ft. Rent Ft. Rent Ft. Rent - ----- -------- -------- ------ --------- ------ -------- ------ -------- 1998 1,405 $ 5,682 424 $ 4,675 25 $ 177 1,854 $ 10,534 1999 3,555 15,054 1,425 15,610 100 1,142 5,080 31,806 2000 3,015 12,649 1,156 14,553 123 1,501 4,294 28,703 2001 3,601 14,851 1,762 21,996 92 1,121 5,455 37,968 2002 4,368 17,913 1,519 17,138 143 1,578 6,030 36,629 2003 3,657 16,083 1,302 16,712 141 1,500 5,100 34,295 2004 1,298 6,067 383 4,878 17 178 1,698 11,123 2005 2,725 8,694 1,023 13,946 216 1,846 3,964 24,486 2006 2,174 8,260 732 10,581 8 108 2,914 18,949 2007 2,344 7,631 573 7,902 76 760 2,993 16,293 2008 and There- after 4,495 15,839 2,064 27,909 1,240 11,187 7,799 54,935 ------ ------- ------ ------- ----- ------ ------ ------- Total Leased 32,637 $128,723 12,363 $155,900 2,181 $21,098 47,181 $305,721 ====== ======= ====== ======= ===== ====== ====== ======= Total Port- folio Sq.Ft. 34,391 12,868 2,249 49,508 ====== ====== ===== ====== Annualized net effective rent per sq. ft. $ 3.94 $ 12.61 $ 9.67 $ 6.48 ======= ======= ====== =======
This stable occupancy, along with stable rental rates in each of the Company's markets, will allow the in-service portfolio to continue to provide a comparable or increasing level of earnings from rental operations. The Company also expects to realize growth in earnings from rental operations through (i) the development and acquisition of additional rental properties in its primary markets; (ii) the expansion into other attractive Midwestern markets; and (iii) the completion of the 5.1 million square feet of properties under development at September 30, 1998 over the next three quarters and thereafter. The 5.1 million square feet of properties under development should provide future earnings from rental operations growth for the Company as they are placed in service as follows (in thousands, except percent leased and stabilized returns):
Anticipated Anticipated In-Service Square Percent Project Stabilized Date Feet Leased Costs Return ------------ ------ ------ -------- ---------- 4th Quarter 1998 2,067 60% $114,708 12.1% 1st Quarter 1999 1,573 18% 87,631 11.4% 2nd Quarter 1999 541 56% 46,914 11.8% Thereafter 907 42% 102,259 10.7% ----- ------- 5,088 43% $351,512 11.5% ===== =======
- 10 - RESULTS OF OPERATIONS --------------------- Following is a summary of the Company's operating results and property statistics for the three and nine months ended September 30, 1998 and 1997 (in thousands, except number of properties and per share amounts):
Three months ended Nine months ended September 30, September 30, ---------------------- -------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Rental Operations revenue $90,348 $56,218 $253,103 $158,722 Service Operations revenue 7,284 5,917 19,206 14,985 Earnings from Rental Operations 30,888 20,454 92,062 57,629 Earnings from Service Operations 2,815 2,325 5,530 4,499 Operating income 30,911 21,322 89,357 57,781 Net income available for common shares 23,449 16,911 67,569 46,593 Weighted average common shares outstanding 81,594 65,309 79,461 63,380 Weighted average common and dilutive potential common shares 93,279 72,971 91,252 71,054 Basic income per common share $ .29 $ .26 $ .85 $ .74 Diluted income per common share $ .29 $ .26 $ .84 $ .73 Number of in-service properties at end of period 428 278 428 278 In-service square footage at end of period 49,508 34,240 49,508 34,240 Under development square footage at end of period 5,088 4,490 5,088 4,490
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THREE MONTHS ENDED SEPTEMBER 30, 1997 ------------------------------------------------------------------------- Rental Operations ----------------- The Company increased its in-service portfolio of rental properties from 278 properties comprising 34.2 million square feet at September 30, 1997 to 428 properties comprising 49.5 million square feet at September 30, 1998 through the acquisition of 118 properties totaling 9.2 million square feet and the completion of 34 properties and four building expansions totaling 6.1 million square feet developed by the Company. The Company also disposed of two properties totaling 21,000 square feet. These 150 net additional rental properties primarily account for the $34.1 million increase in revenues from Rental Operations from 1997 to 1998. The Company received approximately $2.3 million of lease termination payments which are included in rental income for the three months ended September 30, 1998. Included in rental income for the three months ended September 30, 1997 are approximately $252,000 of lease termination payments. The increase from 1997 to 1998 in rental expenses, real estate taxes and depreciation and amortization expense is also a result of the additional 150 in- service rental properties. Interest expense increased by approximately $7.1 million from $9.6 million for the three months ended September 30, 1997 to $16.7 million for the three months ended September 30, 1998 as a result of additional unsecured debt issued in the third quarter of 1997 to fund the development and acquisition of additional rental properties as well as $250 million of unsecured debt issued in the first two quarters of 1998 to fund development and acquisition activity. As a result of the above-mentioned items, earnings from rental operations increased $10.4 million from $20.5 million for the three months ended September 30, 1997 to $30.9 million for the three months ended September 30, 1998. - 11 - Service Operations ------------------ Service Operation revenues increased by $1.4 million from $5.9 million for the three months ended September 30, 1997 to $7.3 million for the three months ended September 30, 1998 primarily as a result of increases in construction management fee revenue due to an increase in third-party construction volume. Service Operations operating expenses increased from $3.6 million to $4.5 million for the three months ended September 30, 1998 as compared to the three months ended September 30, 1997 primarily as a result of an increase in construction activity and an increase in operating expenses resulting from the overall growth of the Company. As a result of the above-mentioned items, earnings from Service Operations increased from $2.3 million for the three months ended September 30, 1997 to $2.8 million for the three months ended September 30, 1998. General and Administrative Expense ---------------------------------- General and administrative expense increased from $1.5 million for the three months ended September 30, 1997 to $2.8 million for the three months ended September 30, 1998 primarily as a result of increases in payroll related expenses, advertising costs and state and local taxes due to the overall growth of the Company. Net Income Available for Common Shares -------------------------------------- Net income available for common shares for the three months ended September 30, 1998 was $23.5 million compared to net income available for common shares of $16.9 million for the three months ended September 30, 1997. This increase results primarily from the operating result fluctuations in rental and service operations explained above. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 TO NINE MONTHS ENDED SEPTEMBER 30, 1997 ----------------------------------------------------------------------- Rental Operations ----------------- The Company increased its in-service portfolio of rental properties from 278 properties comprising 34.2 million square feet at September 30, 1997 to 428 properties comprising 49.5 million square feet at September 30, 1998 through the acquisition of 118 properties totaling 9.2 million square feet and the completion of 34 properties and four building expansions totaling 6.1 million square feet developed by the Company. The Company also disposed of two properties totaling 21,000 square feet. These 150 net additional rental properties primarily account for the $94.4 million increase in revenues from Rental Operations from 1997 to 1998. The Company received approximately $6.3 million of lease termination payments which are included in rental income for the nine months ended September 30, 1998. Included in rental income for the nine months ended September 30, 1997 are approximately $1.9 million of lease termination payments. The increase from 1997 to 1998 in rental expenses, real estate taxes and depreciation and amortization expense is also a result of the additional 150 in- service rental properties. - 12 - Interest expense increased by approximately $15.7 million from $28.2 million for the nine months ended September 30, 1997 to $43.9 million for the nine months ended September 30, 1998 as a result of additional unsecured debt issued in the third quarter of 1997 to fund the development and acquisition of additional rental properties as well as $250 million of unsecured debt issued in the first two quarters of 1998 to fund development and acquisitions. As a result of the above-mentioned items, earnings from rental operations increased $34.5 million from $57.6 million for the nine months ended September 30, 1997 to $92.1 million for the nine months ended September 30, 1998. Service Operations ------------------ Service Operation revenues increased to $19.2 million for the nine months ended September 30, 1998 as compared to $15.0 million for the nine months ended September 30, 1997 primarily as a result of an increase in third-party construction volume. Service Operation operating expenses increased from $10.5 million to $13.7 million for the nine months ended September 30, 1998 as compared to the nine months ended September 30, 1997 primarily as a result of an increase in construction activity and the overall growth of the Company. As a result of the above-mentioned items, earnings from Service Operations increased from $4.5 million for the nine months ended September 30, 1997 to $5.5 million for the nine months ended September 30, 1998. General and Administrative Expense ---------------------------------- General and administrative expense increased from $4.3 million for the nine months ended September 30, 1997 to $8.2 million for the nine months ended September 30, 1998 primarily as a result of increases in payroll related expenses, advertising costs and state and local taxes due to the overall growth of the Company. Net Income Available for Common Shares -------------------------------------- Net income available for common shares for the nine months ended September 30, 1998 was $67.6 million compared to net income available for common shares of $46.6 million for the nine months ended September 30, 1997. This increase results primarily from the operating result fluctuations in rental and service operations explained above. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities totaling $149.1 million and $110.1 million for the nine months ended September 30, 1998 and 1997, respectively, represents the primary source of liquidity to fund distributions to shareholders, unitholders and the other minority interests and to fund recurring costs associated with the renovation and re-letting of the Company's properties. This increase is primarily a result of, as discussed above under "Results of Operations," the increase in net income resulting from the expansion of the in-service portfolio through development and acquisitions of additional rental properties. - 13 - Net cash used by investing activities totaling $470.8 million and $380.5 million for the nine months ended September 30, 1998 and 1997, respectively, represents the investment of funds by the Company to expand its portfolio of rental properties through the development and acquisition of additional rental properties net of proceeds received from property sales. In 1998, $420.2 million was invested in the development and acquisition of additional rental properties and the acquisition of land held for development, including the acquisition of five portfolios consisting of 22 industrial buildings and 17 office buildings. In 1997, the investment in the development and acquisition of additional rental properties and land held for development was $414.6 million. During the nine months ended September 30, 1997, the Company contributed properties to an existing joint venture at an agreed value of approximately $60.8 million and received a cash distribution of $60.0 million from the proceeds of a mortgage loan received in May 1997. The joint venture partner contributed $753,000 of cash to the venture to maintain proportionate ownership interest. During the nine months ended September 30, 1997, the Company also invested $32.2 million in a newly formed joint venture with an institutional investor which allowed the joint venture to purchase office property consisting of approximately 345,000 square feet and 17 acres. Net cash provided by financing activities totaling $333.4 million and $439.2 million for the nine months ended September 30, 1998 and 1997, respectively, represents the source of funds from equity and debt offerings and borrowings on the lines of credit to fund the Company's investing activities. Also included in financing activities are the distribution of funds to shareholders and minority interests. In 1997, the Company received $300.5 million of net proceeds from common equity offerings which was used to pay down amounts outstanding on the unsecured line of credit and to fund current development and acquisition activity. In 1998, the Company received $136.7 million of net proceeds from common equity offerings which was used to pay down amounts outstanding on the unsecured line of credit and to fund current development and acquisition activity. During the nine months ended September 30, 1998, the Company received $21.2 million of net proceeds from the issuance of common stock under its Direct Stock Purchase and Dividend Reinvestment Plan compared to $10.0 million of net proceeds received under the Direct Stock Purchase and Dividend Reinvestment Plan during the first nine months of 1997. In the first quarter of 1998, the Company received $100.0 million of net proceeds from the offering of 7.05% Puttable Reset Securities due March 1, 2006. In the second quarter of 1998, the Company received $100.0 million of proceeds from the offering of 6.75% Senior Notes due May 30, 2008 and $50.0 million in proceeds from the issuance of 7.25% notes under the Company's medium-term note program. In the third quarter of 1997, the Company received $146.1 million of net proceeds from the offering of 7.99% Series B Step-Up Redeemable Preferred Shares and $100.0 million from the offering of 6.95% Pass- Through Asset Trust Securities due August 2004. The Company has a $450 million unsecured line of credit which matures in April 2001. This facility was increased from $250 million in September 1998 and bears interest payable at the 30-day LIBOR plus .50% - .80%. The Company also has a demand $7 million secured revolving credit facility which is available to provide working capital. This facility bears interest payable at the 30-day LIBOR rate plus .65%. - 14 - The Company currently has on file Form S-3 Registration Statements with the Securities and Exchange Commission ("Shelf Registrations") which had remaining availability as of September 30, 1998 of approximately $1.2 billion to issue common stock, preferred stock or unsecured debt securities. The Company intends to issue additional equity or debt under these Shelf Registrations as capital needs arise to fund the development and acquisition of additional rental properties. The total debt outstanding at September 30, 1998 consists of notes totaling $1.027 billion with a weighted average interest rate of 7.29% maturing at various dates through 2028. The Company has $699.0 million of unsecured debt and $328.0 million of secured debt outstanding at September 30, 1998. Scheduled principal amortization of such debt totaled $5.3 million for the nine months ended September 30, 1998. Following is a summary of the scheduled future amortization and maturities of the Company's indebtedness at September 30, 1998 (in thousands):
Repayments ------------------------------------------- Weighted Average Scheduled Interest Rate of Year Amortization Maturities Total Future Repayments ---- ------------ ---------- ----------- ---------------- 1998 $ 1,673 $ 6,999 $ 8,672 6.59% 1999 5,905 30,450 36,355 6.41% 2000 6,288 64,850 71,138 7.14% 2001 5,954 183,560 189,514 6.72% 2002 6,462 50,000 56,462 7.39% 2003 4,519 66,144 70,663 8.46% 2004 3,509 177,032 180,541 7.41% 2005 3,800 100,000 103,800 7.49% 2006 4,117 100,000 104,117 7.07% 2007 3,653 14,955 18,608 7.75% Thereafter 37,175 150,000 187,175 6.89% ------ ------- --------- Total $83,055 $943,990 $1,027,045 7.29% ====== ======= =========
The Company intends to pay the following regular quarterly dividends from net cash provided by operating activities:
DIVIDEND DESCRIPTION PER SHARE DECLARATION SHAREHOLDER DATE DATE OF EQUITY DECLARED DATE OF RECORD PAYABLE ----------- --------- ---------------- ----------------- --------------- Common Stock $ .34 October 22, 1998 November 12, 1998 November 30, 1998 Series A Preferred $.56875 October 22, 1998 November 16, 1998 November 30, 1998 Series B Preferred $.99875 October 22, 1998 December 17, 1998 December 31, 1998
FUNDS FROM OPERATIONS Management believes that Funds From Operations ("FFO"), which is defined by the National Association of Real Estate Investment Trusts as net income or loss excluding gains or losses from debt restructuring and sales of property plus depreciation and amortization, and after adjustments for minority interest, unconsolidated partnerships and joint ventures (adjustments for minority interest, unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis), is the industry standard for reporting the operations of real estate investment trusts. - 15 - The following table reflects the calculation of the Company's FFO for the three and nine months ended September 30 as follows (in thousands):
Three months ended Nine months ended September 30, September 30, ------------------ ------------------ 1998 1997 1998 1997 ------ ------ ------ ------ Net income available for common shares $23,449 $16,911 $ 67,569 $46,593 Add back: Depreciation and amortization 17,660 10,702 48,445 30,253 Share of joint venture adjustments 1,101 757 2,651 2,071 Earnings from property sales (661) (1,425) (1,615) (1,807) Minority interest share of add-backs (2,128) (938) (5,966) (2,980) ------ ------ ------- ------ Funds From Operations $39,421 $26,007 $111,084 $74,130 ====== ====== ======= ====== Cash flow provided by (used by): Operating activities $ 48,798 $ 38,676 $149,109 $110,138 Investing activities (119,313) (205,129) (470,801) (380,536) Financing activities 70,169 337,478 333,372 439,196
The increase in FFO for the three and nine months ended September 30, 1998 compared to the three and nine months ended September 30, 1997 results primarily from the increased in-service rental property portfolio as discussed above under "Results of Operations." While management believes that FFO is the most relevant and widely used measure of the Company's operating performance, such amount does not represent cash flow from operations as defined by generally accepted accounting principles, should not be considered as an alternative to net income as an indicator of the Company's operating performance, and is not indicative of cash available to fund all cash flow needs. RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS In March 1998, the Emerging Issues Task Force of the Financial Accounting Standards Board reached a consensus on Issue No. 97-11 "Accounting for Internal Costs Relating to Real Estate Property Acquisitions" which requires the internal cost of pre-acquisition activities incurred in connection with the acquisition of an operating property be expensed as incurred. During the first three months of 1998, prior to adopting Issue No. 97-11, the Company capitalized approximately $275,000 of internal costs of pre- acquisition activities which under Issue 97-11 would have been expensed. YEAR 2000 The Company recognizes that the Year 2000 problem could affect its operations as well as the proper functioning of the embedded systems included in the Company's properties. In any particular property, the problem could affect the functioning of elevators, heating and air conditioning systems, security systems and other automated building systems. The Company continues to evaluate the Year 2000 readiness of its operations and those of its properties, through identifying and contacting suppliers of building systems and other critical business partners to determine if the building systems are affected and whether these entities have an effective plan in place to address the Year 2000 issue. The Company also continues to evaluate its own systems to determine the impact of the Year 2000. The Company has completed the process of inventorying and evaluating the existing properties' systems and intends to continue to inventory and assess - 16 - the systems of new properties as developed and acquired. The Company has developed a work plan detailing the tasks and resources required to ready its and its properties' operations and systems for the Year 2000. This work plan includes prioritization of all systems and appropriate timetables for the necessary remediation and testing of these systems, as well as contingency plans if readiness cannot be achieved. Contingency plans generally provide for obtaining or allowing for alternative access, limited electrical service, security and other basic services. In addition, in many cases the Company will be relying on statements from outside vendors as to the Year 2000 readiness of their systems, and will not, in most circumstances, attempt any independent verification. Based on the information prepared by the Company or received to date, the Company expects that the costs to achieve Year 2000 readiness will not be material. The Company expects to pass on most of the costs to achieve Year 2000 readiness in any particular property to the tenants, and will otherwise expense the costs as incurred. There can be no assurance that the Company will be able to identify and correct all aspects of the Year 2000 problem that affect it in sufficient time, that its contingency plans or that the costs of achieving Year 2000 readiness will not be material. The Company, however, does not currently expect the Year 2000 problem will have a material impact on the Company's business, operations, or financial condition. - 17 - PART II - OTHER INFORMATION Item 1. Legal Proceedings -------------------------- None Item 2. Changes in Securities ------------------------------ None Item 3. Defaults upon Senior Securities ---------------------------------------- None Item 4. Submission of Matters to a Vote of Security Holders ------------------------------------------------------------ None Item 5. Other Information -------------------------- When used in this Form 10-Q, the words "believes," "expects," "estimates" and similar expressions are intended to identify forward looking-statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially. In particular, among the factors that could cause actual results to differ materially are continued qualification as a real estate investment trust, general business and economic conditions, competition, increases in real estate construction costs, interest rates, accessibility of debt and equity capital markets and other risks inherent in the real estate business including tenant defaults, potential liability relating to environmental matters and illiquidity of real estate investments. Readers are cautioned not to place undue reliance on these forward- looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also advised to refer to the Company's Form 8-K Report as filed with the U.S. Securities and Exchange Commission on March 29, 1996 for additional information concerning these risks. Item 6. Exhibits and Reports on Form 8-K ----------------------------------------- Exhibits -------- Exhibit 15. Letter regarding unaudited interim financial information Exhibit 27. Financial Data Schedule (EDGAR Filing Only) Reports on Form 8-K ------------------- None. - 18 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DUKE REALTY INVESTMENTS, INC. ----------------------------- Registrant Date: November 12, 1998 /s/ Thomas L. Hefner --------------------- ----------------------------- President and Chief Executive Officer /s/ Darell E. Zink, Jr. ----------------------------- Executive Vice President and Chief Financial Officer /s/ Dennis D. Oklak ------------------------------ Executive Vice President and Chief Administrative Officer (Chief Accounting Officer) - 19 - EX-15 2 AUDITORS' LETTER Exhibit 15 - ---------- The Board of Directors Duke Realty Investments, Inc. Gentlemen: RE: Registration Statements Nos. 33-64567, 33-64659, 33-55727, 333-04695, 333-24289, 333-26833, 333-66919 and 333-26845 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated October 30, 1997 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant, or a report prepared or certified by an accountant within the meaning of sections 7 and 11 of the Act. KPMG Peat Marwick LLP Indianapolis, Indiana November 9, 1998 EX-27 3 1997 AMENDED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES' SEPTEMBER 30, 1997 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 SEP-30-1997 174,132 0 35,044 (1,236) 0 206,007 1,767,739 (103,236) 1,926,469 95,635 596,239 0 218,338 997,997 0 1,926,469 0 176,736 89,343 0 13,578 0 28,247 46,593 0 46,593 0 0 0 46,593 $.74 $.73
EX-27 4 1998 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES' SEPTEMBER 30, 1998 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 SEP-30-1998 22,033 0 59,927 (1,558) 0 93,609 2,642,509 (161,649) 2,651,009 144,610 1,027,045 0 218,338 1,152,313 0 2,651,009 0 275,031 139,218 0 24,318 0 43,926 67,569 0 67,569 0 0 0 67,569 $.85 $.84
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